Why Did Medicare Advantage Enrollment Grow as Payment Pressure Increased?

Urban Institute Research Report

Medicare Advantage (MA), also known as Medicare Part C, gives Medicare beneficiaries an option to receive their Parts A and B benefits through private health insurance plans as an alternative to traditional Medicare. MA has been attractive to many Medicare beneficiaries in part because of several enhancements plans typically make to the Part A and B benefit packages. For example, depending on MA plans’ bids, they receive rebates that they must use to offer supplemental benefits such as dental, vision, and hearing coverage at no extra cost, or other benefit enhancements such as yearly limits on out-of-pocket spending and low or $0 premiums beyond that required for Part B. Most Medicare Advantage plans also include integrated Part D prescription drug coverage. In addition, MA plans must also have an out-of-pocket maximum, which is not available in traditional Medicare without supplemental coverage. Overall, MA is often a cheaper, one-stop-shopping alternative compared to a comprehensive traditional Medicare package that includes Part A, Part B, Part D, and MediGap (Berenson 2004). However, though beneficiaries enrolled in the traditional Medicare program enjoy access to almost any health care provider, MA plan enrollees are generally limited in their choice of provider and may need a referral to see a specialist or prior authorization to obtain a particular procedure or service.

Many policymakers believe including private health insurance plans in Medicare has the potential to improve quality, increase beneficiaries’ choices, and reduce government spending, among other policy objectives (Berenson and Dowd 2009). But, the federal government has struggled to control MA costs, and in 2009, average payments to MA plans peaked at 114 percent of spending on traditional Medicare (MedPAC 2009a). These overpayments to private plans were partially attributed to the bidding and benchmark process, established in the Medicare Modernization Act of 2003 to stabilize declining plan participation and benefit generosity of private plans in Medicare (Berenson and Dowd 2009; Patel and Guterman 2017; Zarabozo and Harrison 2009).

The Affordable Care Act (ACA), enacted in 2010, introduced several changes to the MA payment rate calculation to better align Medicare spending on private plan enrollees with average spending per traditional enrollee. Under the ACA, the Centers for Medicare & Medicaid Services (CMS) sets county level benchmarks at four levels based on estimated per capita spending in traditional Medicare, where the quartile of counties with the highest per capita traditional Medicare spending is assigned a benchmark of 95 percent of traditional Medicare cost, and the lowest-spending quartile is assigned a benchmark of 115 percent of traditional Medicare costs (Biles et al. 2012). The ACA also lowered the rebate amounts from 75 percent to 50–70 percent of the difference between the benchmark and a plan’s bid, depending on the plan’s quality ratings, and allowed plans with four-star quality ratings and above to receive both higher benchmarks and rebate percentages (Hayes 2015). Changes introduced under the ACA succeeded in lowering the payments MA plans from an average of 114 percent of traditional Medicare spending per beneficiary in 2009 to an average of 101 percent in 2018 (MedPAC 2009b, 2017).

The CMS Office of the Actuary and the Congressional Budget Office expected ACA payment changes to reduce enrollment in MA plans by making private plans less attractive to both insurers, through reduced payments, and beneficiaries, through expected cuts to supplemental benefits and increased cost sharing (Foster 2010; Nicholas 2014). Despite those expectations, MA plan enrollment has nearly doubled since ACA implementation, increasing from 10.5 million in 2009 to 18.5 million in 2017 (MedPAC 2018a). Today, one-third of Medicare beneficiaries are enrolled in private plans, a share that the Congressional Budget Office estimates will increase to 42 percent by 2028.

Research shows that MA programs’ significant growth in recent years has likely been aided by several factors that also helped plans withstand payment cuts (Guterman, Skopec, and Zuckerman 2018; L&M Policy Research 2016; MedPAC 2009b, 2017, 2018b; Skopec, Zuckerman, and Aarons, forthcoming; Song and Pelech 2018). First, quality bonus payments to MA plans may have alleviated the impact of payment rate cuts. For example, the ACA established bonus payments only for plans that achieve a four-star or higher quality rating, but between 2012 and 2014, CMS conducted a three-year demonstration project that extended bonuses to plans with three- or three-and-a-half-star ratings. An independent evaluation did not find evidence that the demonstration improved MA performance on clinical measures relative to other health insurance sectors (L&M Policy Research 2016). Plan consolidation has also allowed some plans to obtain larger quality bonuses than they would have otherwise received (MedPAC 2018b).

Second, the ACA phased in payment cuts over several years, giving plans time to adjust by controlling costs. On average, MA plans reduced their bids from 102 percent of traditional Medicare spending per beneficiary in 2009 to 90 percent in 2018 (Guterman, Skopec, and Zuckerman 2018; MedPAC 2009b, 2017). Contrary to initial fears, MA plans lowered their bids without reducing supplemental benefits or increasing premiums and cost sharing, resulting in relatively stable enrollee access and affordability since ACA implementation (Skopec, Zuckerman, and Aarons, forthcoming; Song and Pelech 2018).

Third, rebate reductions under the ACA have been modest; nationally, rebates declined from an average of 12 percent of traditional Medicare spending per beneficiary in 2009 to 10 percent in 2017 (MedPAC 2009b, 2017). Average rebate amounts per beneficiary have grown since ACA implementation, from $83 per beneficiary per month in 2011 to $95 in 2018 (MedPAC 2017, 2018b).

Finally, MA plans’ payments are risk adjusted to account for variation in enrollee risk across MA plans and between MA plans and traditional Medicare. Over time, risk scores for MA plans have increased because MA plans more completely code relevant patient diagnoses than traditional Medicare (Kronick 2017). This results in increased risk adjustment payments to MA plans, which could have offset payment cuts, helping preserve revenue (Guterman, Skopec, and Zuckerman 2018; Kronick 2017). While the ACA included an adjustment to risk scores to partially correct for this problem, that adjustment is insufficient to fully recapture excess risk adjustment payments to MA plans (MedPAC 2018b).

These findings alone do not fully explain MA’s rapid growth, however. Stable rebates and premiums would be expected to yield stable MA enrollment or modest growth, not rapidly double the size of the program. This report disaggregates MA enrollment growth by plan type and geography to better understand variation in the growth of Medicare private plans and explores county-level market and demographic changes associated with increased MA penetration.

Full report available here.